Citi Downgrades Two E&P MLPs

By Sam Mamudi

In our low-yield world, master limited partnerships are a popular choice for investors looking for investments that throw off some cash. They’re something we’ve covered quite a lot here at Barron’s recently, explaining how to invest in them, and pointing out some of the most attractive ones (thank you, Mr. Icahn).

But that doesn’t mean, of course, that all MLPs are equally attractive — and proof of that comes from a Citigroup research note today downgrading Breitburn Energy Partners (BBEP) and EV Energy Partners (EVEP). As analyst John Tysseland writes:

We are downgrading BBEP to Neutral (2) as the units are now trading in in-line with our target price. Notably, BBEP generated a total return of 19% in the last twelve months, outperforming both its E&P MLP peers, up 0.8% and the S&P 500 Index, up 16.6%. Given our outlook for commodity prices (~30% of oil production sold at Brent pricing) and the partnership’s current valuation, the units seem to be fairly priced at this point. In terms of yield, BBEP is trading at a ~23bp discount to peer group average current yield of 9.1% (excl. EVEP)…

We are downgrading EVEP from Buy to Neutral and reducing our TP to $48/unit ($60.50/unit previously). We estimate that ~26% of the partnership’s equity value is supported by its Utica net working interest acreage that we believe could come under pressure as other operators now look to reduce exposure in the play. Until investors get a better handle on what this acreage is actually worth, upside from current levels appears limited.

At the latest, both Breitburn Energy and EV Energy shares are down slightly more than 3%.

The underperformance this month was largely due to a weakening crude oil outlook and a total return of -13.9% generated by EVEP as a result of falling Utica acreage value expectations.

As we look ahead, based on Citi’s Commodity Strategy Team forecast, it is likely that covered E&P MLPs do not get a significant lift from the commodity markets in 2013 and 2014. For instance, the commodities team expects WTI crude and Henry Hub gas prices to average $90.00 per barrel and $4.30 per MMBtu in 2013E, respectively (for more details, please see section entitled Commodity Price Outlook). This compares to current 2013 NYMEX average prices for crude oil and natural gas of $93.1 per barrel and $4.08 per MMBtu, respectively. Rather, in our view, upside in 2013 is contingent upon strong operational performance and the ability to find and fund accretive acquisitions leading to growth in the distribution to unit holders.

But as he shows in this chart, E&P MLPs have had a pretty decent run recently, especially since early 2009 (with a few dips along the way):

(Click for a larger — and legible — version.)

And there’s still picks in the sector: Tysseland kept his Outperform rating on Legacy Reserves (LGCY), Memorial (MEMP) and Vanguard Natural (VNR).

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MAY 1, 2013 8:24 P.M.

Bob wrote:

I would like to see analysts scrutinized hard by the SEC. Was he working for the ones who were dumping $10-15 ago? Now we're supposed to go 'eek' and sell and in 6-8 mos and after $10-15 in the other direction he says..'Looks fine now.' Just how much are these guys playing a game?

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